Coronavirus could cut Israel's annual growth by 1%

Airport workers in masks against coronavirus  / Photo: Reuters

The Bank of Israel has already cut Israel's growth forecast for 2020 to 2.9%.

The outbreak and spread of the coronavirus epidemic is liable to reduce Israel's GDP by NIS 3.6-14 billion, 0.25-1%, according to the main scenarios discussed by the Ministry of Finance. These scenarios do not include a nightmare scenario of a large-scale outbreak of the virus in Israel.

At an emergency meeting in Jerusalem summoned by Minister of Finance Moshe Kahlon, with participation from heads of the Ministry of Finance and the Bank of Israel, Ministry of Finance chief economist Shira Greenberg said economic activity had not been damaged at the macro level so far, but that reports from companies about potential effect on their activity, and in some cases actual damage, were accumulating at the Ministry of Finance.

Governor of the Bank of Israel Prof. Amir Yaron said at the meeting that if the crisis is prolonged and spreads to other countries, especially if severe preventative measures are needed in Israel, the effect would be more substantial, and that it was difficult to estimate its extent at this stage. The revised 2020 growth forecast published by the Bank of Israel in January is 2.9%, down from 3%.

Kahlon commissioned a status report from an economic forum in order to assess the consequences of the coronavirus epidemic on the Israeli economy. Participants in the discussion, which addressed the consequences of coronavirus and formulated a general policy, included Yaron, Deputy Minister of Finance Yitzhak Cohen, Ministry of Finance director general Shai Babad, Israel Tax Authority director Eran Yaacov, Ministry of Finance budget director Shaul Meridor, Accountant General Rony Hizkiyahu, Ministry of Finance director of salary and employment agreements Kobi Bar-Nathan, Greenberg, Ministry of Finance legal advisor Asi Messing, Capital Markets, Insurance and Savings Authority head Moshe Bareket, National Economic Council chairman Prof. Avi Simhon, Ministry of Finance Cyberspace, Emergency and Security Department head Yonatan Mor, and Israel Securities Authority chief economist and strategic advisor Ilan Gildin.

Kahlon asked Babad to form a team in the Ministry of Finance to monitor developments. Cohen said that Israel was among the few countries in the world making preparations for any scenario involving the coronavirus. Meridor said that the budget department saw no macroeconomic effect of the virus as of now, but hinted that a substantial increase in spending by the Ministry of Health was imminent. "We are currently working closely with the Ministry of Health to provide a budget solution for a responsible national effort," Meridor said.

Hizkiyahu also addressed spending by the health system, saying, "We are receiving many requests, to which we are responding fully in cooperation with the Ministry of Health. The event is being managed and handled now, and it is well that it is being handled in this fashion. It is important for the event to be handled together, without diffusion of effort." Bar-Nathan said that he had instructed the government ministries and public sector employers to allow these workers to spend two weeks of their sick leave at home, in accordance with the Ministry of Health's instruction.

Bareket said, "At the moment, investment managers are not overly worried. They say that if the event is a short-term one, there is no indication right now that money is being withdrawn from the various tracks."

Yaron explained, "The emphasis right now is that the event is unfolding, and the conclusions to date should be treated with caution. It is very important to continue constant monitoring and analysis, among other things through a financial stability committee including all of the financial regulators, so that it will be possible to respond appropriately and quickly, if necessary."

Yaron added, "If the spread of the virus comes to a halt in the coming months, as in the basic assumption guiding the assessments of most of the international economic institutions, the total effect on the global economy is expected to be limited, with compensatory growth taking place in the coming quarters… In this scenario, no significant macroeconomic effect is expected in Israel beyond the individual effect on various companies, even though China is an important trade partner in a variety of sectors." Yaron nevertheless went on to say that the forecasts contained a significant element of uncertainty, given the importance of China to the global economy and the spread of the coronavirus to additional countries.

"Uncertainty focuses on two main aspects," Yaron stated. "The influence that the virus has on other economies, including Israel, beyond the Chinese economy, and the time it will take before the event passes." According to Yaron, "If the crisis is prolonged and spreads to other countries, and especially if severe preventative measures are required in Israel, a more substantial effect is expected, the extent of which is difficult to assess at this stage." Greenberg remarked, "The spread of the coronavirus us more significant than SARS in 2003, when the cost in global GDP was 0.1%. The weight of China in global GDP has quadrupled since 2003, and its weight in international trade has increased 2.5-fold."

Greenberg added that no damage to economic activity was evident in the official statistics, "Some of the large companies indicated potential channels of damage, and some of these also reported existing damage. Two scenarios for damage to economic activity were examined in the department, given economic activity with China (without the disease spreading to Israel). In the first scenario, in which the virus lasts for one quarter, possible damage amounts to 0.2% of GDP, which does not constitute substantial macroeconomic damage. In the second scenario, in which the virus continues much longer, damage is liable to exceed 1% of GDP. These scenarios do not include the spread of the coronavirus in Israel on a significant scale."

Published by Globes, Israel business news - en.globes.co.il - on February 25, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Airport workers in masks against coronavirus  / Photo: Reuters
Airport workers in masks against coronavirus / Photo: Reuters
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